Log in with your social account:

S&P LCD Zone features news and analysis from S&P Capital IQ’s Leveraged Commentary and Data (LCD), the premier source of U.S./European leveraged finance and distressed debt market information. LCD’s team of journalists and analysts works with market players to provide timely and insightful coverage of leveraged loans, corporate and high-yield bonds, distressed situations and bankruptcy. S&P Capital IQ, a brand of McGraw-Hill Financial (NYSE: MHFI), is a leading global provider of multi-asset class data, research and analytics to institutional investors, investment advisors and wealth managers. It provides a broad suite of capabilities that track performance, generate alpha and identify new trading and investment ideas.
full bio →

February Analysis - US Leveraged Loan Market

The loan market caught fire in January, with inflows far exceeding supply. Early February has seen a slight cooling, in response to rising new issue activity.

Propelled by positive sentiment and muscular demand, the average price of the S&P/LSTA climbed to a post-credit crunch high of loan prices reached a post-credit crunch high of 97.7 percent of par. As a result, the Index gained 1.1%, its best performance since September.

Demand hit on all cylinders in January. CLO issuance reached a fresh five-and-a-half year high of $9 billion. Retail inflows, meanwhile, totaled $2.9 billion according to EPFR, the most since May 2011. Finally, managers say they continued to see a steady stream of allocations from pension funds and other institutional investors.

With the scale heavily weighted to demand, it was not for nothing that new-issue clearing yields fell significantly in January, reaching new credit-crunch lows. Roughly speaking, BB loans were printing in a 3% context and single B’s in a 4-5% range.

Issuers also took advantage of their technical advantage to structure 55% of new loans as covenant-lite. That pushed the percent of Index loans with only incurrence test to a record 30%.

Another consequence of hot market conditions was a surge in repricing activity, which reached a post 2007 high of $41 billion in January, with another $30 billion announced during the first 10 days of February.

.

Switching gears, the loan market default rate inched up to 1.4% in January from 1.3% at yearend, though remains well inside the historical average of 3.3%. Managers expect the rate to reach 2% or so by December according to LCD latest buy-side poll from mid-December.

In early February, the market remained issuer friendly, but some of the froth was gone. The reason was largely the formal announcement of Dell’s LBO, which, if completed, would including a $5.5 billion institutional loan tranche, the largest such execution since 2007. That deal helped push the all-important forward calendar of M&A-related loan financing near the recent high of $22 billion. The outlook for inflows, meanwhile, is mixed. While retail and institutional investors continue to put money to work in the space in early February, CLO issuance was slowing as narrower loan spreads nicked equity arbitrage. Managers generally expect a decent amount to close in February but without a significant increase in new-issue supply volume could downshift considerably by March. Finally, participants generally expect benign conditions to prevail in the months ahead, though all the obvious macro concerns persist.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.